Behind iPhone Face ID Is a Battle Over Costs

Behind iPhone Face ID Is a Battle Over Costs

The $ 3.2 billion acquisition of Finisar Corp. by II-VI Inc. (pronounced "two-six") is really about one thing: how much it costs Apple Inc. to build iPhones with Face ID.

After the first whispers emerged in 2016, the Apple, the stocks of 3-D sensor devices surged inside a few months.

The 12-year-old story has been finalized by Finisar, II-VI and competitor Lumentum Holdings Inc., all of which make the vertical cavity surface lasers, or VCSELs, that Apple needs. Demand for lidar, the laser-based scanners used in autonomous cars, that is, use VCSELs, has yet to materialize in any significant way. Meanwhile, smartphone sales are slowing down, and Apple is squeezing it better. The firms' stocks have stagnated.

The iPhone maker likes to have two or more suppliers for each component. It can then play against one another, allowing it to become safer. Austria's AMS AG, which is the iPhone's Face ID sensor array, said it would decline in the fourth quarter. The message was clear: Apple was paying less for each component.

In addition to the existing three existing VCSEL suppliers, others, such as AMS and Royal Philips NV, make the components but do not require the specifications required by Apple.

That's why Friday's acquisition is a logical step. It gives more power in their negotiations with Apple.

There are other advantages to the deal, which is set to close in the middle of next year. It values ​​Finisar at about 17 times its projected 2020 earnings (its fiscal year ends in April). That looks like a decent bit of business for II-VI, which is currently trading at 14 times forward earnings. The companies expect cost synergies of $ 150 million within three years of closing by combining manufacturing capabilities and leaning on cross-selling to each other's customers in smartphones and beyond.

But Apple is the biggest concern. As the 3-D sensor technology matures, the iPhone maker will most likely demand even lower prices. By reducing the number of competitors, the pendulum wants to swing back into II-VI's favor. Finishing a new factory in Texas, II-VI is hoping to make a living.

To contact the author of this story: Alex Webb at awebb25@bloomberg.net

To contact the editor responsible for this story: Daniel Niemi at dniemi1@bloomberg.net

This column does not reflect the opinion of the editorial board or Bloomberg LP and its owners.

Alex Webb is a Bloomberg Opinion columnist covering Europe's technology, media and communications industries. He previously covered Apple and other technology companies for Bloomberg News in San Francisco.

© 2018 Bloomberg L.P.

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